The first decade of this century has been characterized not only by the best shipping times ever, but also by a new breed of shipowner who was financially astute, capital markets cognizable and friendly, and with a mission statement of shareholder value optimization hanging high from the yardarm of their ships and their roadshow presentations.
True to the spirit of the decade that made securitization of debt a very profitable alchemy of the financial industry by slicing risk into different ‘trade-able’ tranches, the shipping industry was fast at catching up with the ‘divide and conquer’ strategy. While private shipowners stack to what had worked for them in the past, publicly traded owners devised business models that were appealing and sale-able to Wall Street and the institutional investors. There were companies that were paying out based on spot VLCC market exposure, companies that were ‘yield driven’ irrespective of underlying shipping market conditions, capesize shipowners with full spot market exposure and a ‘China play proxy’ positioning, dry bulk owners to reflect the ubiquitous Baltic Dry Index (BDI); there were even owners that moved into the ice-class products tanker market, and post-crisis, there were plans for crude oil ice-class tanker IPO to exploit the lightness of such being in the public capital markets…
‘Mono-line’ shipping business models definitely have their advantages. They optimize economies of scale, operational leverage, cost savings, and critical mass of modern tonnage to entice major charterers and trading houses, etc One additional benefit of such business models is that it’s easily understood and explained to the investment community, without undue complications and multiple layers and overlaps with inputs from other market segments and industries. For example, for a VLCC owner of ten vessels trading on the spot market, the financial model was nice and neat: capital investments and financial expenses were known, operating expenses contracted to third parties at known daily rates were plugged to the financial model, and only the projection of future VLCC rates was the big unknown. Modeling out a year or so was rather easy…and unquestionably worked lively when the times were great.
Fast forward to the lower arch of the business cycle, and canvassing the publicly traded shipping companies, it seems that shipping companies active in markets with a narrow focus that appealed to the investors in the past, have their fair share of problems. After all, if the VLCC market is oversupplied and in a burning cash mode for more than a year now and with the underlying economics of the market still unfavorable, a narrowly focused VLCC owner has few options…the market is the market, and no much can change in shipping in the short term (sparing a geopolitical or macro-economic event or event of unforeseen nature). However, if this particular VLCC owner had also exposure to other market segments such as product tankers or dry bulk vessels, or possibly in other horizontally integrated business such as ports, terminals, storage facilities, etc., then, they might have had a better chance… Of course, all shipping segments are highly correlated, and any diversification, whether vertical or horizontal, would not save from low freight rates, but might have increased the chances of survival…maybe ‘lard’ rather than ‘leanness’ make better buffers in shipping…
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